TY  - JOUR
AU  - Mendoza,Enrique G.
AU  - Quadrini,Vincenzo
AU  - Ríos-Rull,José-Victor
TI  - On the Welfare Implications of Financial Globalization without Financial Development
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13412
PY  - 2007
Y2  - September 2007
UR  - http://www.nber.org/papers/w13412
L1  - http://www.nber.org/papers/w13412.pdf
N1  - Author contact info:
Enrique G. Mendoza
Department of Economics
University of Maryland
College Park, MD 20742
Tel: 301/405-3845
Fax: 301/405-7835
E-Mail: mendozae@econ.umd.edu

Vincenzo Quadrini
Department of Finance and Business Economics
Marshall School of Business
University of Southern California
701 Exposition Boulevard
Los Angeles, CA 90089
Tel: 213/740-6521
Fax: 213/740-6650
E-Mail: quadrini@usc.edu

Jose-Victor Rios-Rull
University of Pennsylvania
Department of Economics
3718 Locust Walk
Philadelphia, PA 19104
Tel: 215/898-7767
Fax: 215/573-2057
E-Mail: vr0j@econ.upenn.edu
M3  - presented at "ISOM", June 15-16, 2007
AB  - It is widely argued that countries can reap large gains from liberalizing their capital accounts if financial globalization is accompanied by the development of domestic institutions and financial markets. However, if liberalization does not lead to financial development, globalization can result in adverse effects on social welfare and the distribution of wealth. We use a multi-country model with non-insurable idiosyncratic risk to show that, if countries differ in the degree of asset market incompleteness, financial globalization hurts the poor in countries with less developed financial markets. This is because in these countries liberalization leads to an increase in the cost of borrowing, which is harmful for those heavily leveraged, i.e. the poor. Quantitative analysis shows that the welfare effects are sizable and may justify policy intervention.
ER  -